Apple Enjoys Impenetrable Reputation … In Spite of Itself

April 30, 2012 § 1 Comment

As you may have seen over the weekend, the New York Times published an attention-grabbing story on how Apple avoids billions of dollars in corporate tax obligations by channeling profits through a complex, multi-national maze that last year saved its investors $2.4B.  In fact, as I write this post, it’s the main topic of discussion on CNBC.

I don’t begrudge Apple for mitigating its taxes – that’s simply good business – but it’s an eyebrow raising story.  Not just because of the great lengths Apple goes to, to avoid what seems to be the spirit of the tax code, even if it’s operating well within legal boundaries, but because of how quickly and fervently its customers (of which I am one, several times over) quickly come to its reputational aid, allowing it to enjoy a double-standard that other companies can only dream about.  Arguments in Apple’s defense include such gems as:

“I’d rather have them allocate their capital than the government.”

And, “better to invest the dollars back into product innovation than into the government’s coffers,”

And perhaps my favorite, “Apple’s tax strategy allows them to keep prices lower.”  Lower prices!?  Really? 

Undoubtedly, Apple can find uses for its cash that are more in alignment with its investors’ interests — that’s not my point.  My point is the bullet-proof halo that Apple has earned after years of producing beloved hardware and software products (from Macs to iTunes to iPods to iPhones to iPads … and now, iCloud), that allows it to walk the line of the tax code and possibly even corporate integrity, while maintaining its status as a customer-focused, community-friendly company.  In fact, Apple’s “reality distortion field” is so mesmerizing and thick that it persists despite a growing rap sheet of behavior that at best underscores Apple’s imperfections, and at worst demonstrates behavior inconsistent with that of a company that is truly focused on its customers.  A few, top-of-mind examples:

  • The signal to the iPhone 4’s internal antenna is distorted when you hold it in the palm of your hand.  Jobs’ initial response was to instruct us not to hold it that way (Apple later offered vouchers for free cases that compensated for the interference, but never fixed the root cause of the problem)
  • iPhone users have unknowingly had their web browsing tracked by Safari with a loophole that let Google install cookies (Apple later fixed the issue with a software patch)
  • Apple has been accused of addressing viruses on its own schedule, putting millions of users at risk
  • While considered by many to be a stroke of operational genius, Apple’s ruthless supply chain strategies tie up critical components needed by competitive devices, arguably suppressing competition and consumer choice
  • Steve Jobs bucked the generally accepted trend of driving innovation by listening to customers when he said, “a lot of times, people don’t know what they want until you show it to them” (although it’s hard to argue with the company’s exceptional track record)
  • And now, extraordinary tax avoidance

Bravo, Apple!  You have successfully constructed a virtuous cycle of product and reputation that insulates you from missteps and PR gaffes.  But you’d better keep the cool products coming, or you’ll quickly find yourself back on earth with everyone else.

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Beyond the politicking, the 30% “Apple Tax” is good for subscription publishers

February 16, 2011 § 4 Comments

In a story picked up by the Wall Street Journal and many other media outlets today, Apple clarified the new ground rules that publishers who wish to offer subscription services through its iTunes interface must abide by.  Starting this summer, publishers who promote subscription services via link-outs from their iPhone or iPad apps will be required to integrate the sign-up within the app itself, using Apple’s new payment platform.  Apple will levy a 30% fee for each sign-up.  Other details include:

  • Companies can continue to sell through their own Sites, but must then offer the same service and pricing within the Apple application
  • Companies can continue to link to their own subscription registration pages from the app, but must then offer the in-app registration option as well
  • Apple won’t automatically forward new customer name and email information to the publisher; the customer must opt-in for this to occur.  Apple claims this is to protect customer privacy
  • Compliance is expected no later than June 30

Predictably, the initial reaction from publishers is that the sky has fallen.  One publisher, representing the sentiment of many, I’m sure, was quoted as saying that the Apple Tax is “economically untenable” with its business model.  Another has said that the customer data opt-in provision gets in the way of its ability to forge a relationship with its users.  But let’s look at this issue from a different perspective.

As Apple is acting as a performance based channel (publishers pay no fees for listing their apps in the iTunes Store), the “tax”, as it’s been called, is no different from an affiliate commission.  Sales affiliates routinely command fees of 30% or more.   I’ve seen as high as 70%.  With benchmarks like these, 30% seems rather fair.  Until now, publishers have been getting a free ride.

Another important factor is customer lifetime value (CLV).  Any company publishing content worth its weight in salt is going to (1) be able to charge a premium relative to its cost to produce, and (2) retain the subscriber beyond the initial subscription period.  Its fully-loaded monthly margin, multiplied by its average subscriber months, is its CLV, which is offset by its initial Customer Acquisition Cost (CAC).  Assuming the Apple charge is one-time only, many publishers will more than recover the fee over the lifetime of the subscriber.  And let’s not forget that had it not been for Apple, the publisher would have incurred a CAC through its other channels.  And the cost to acquire a new sub – we’re talking about for paid services now – is typically non-trivial.  If your service commands a $100 annual subscription price, resulting in a $30 fee to Apple, you’re probably pretty happy.  Many publishers invest $100 or more to acquire a new sub.

I also expect that savvy publishers will identify ways to circumvent the system.  Apple seems to be saying that pricing (and let’s assume special offers as well) inside the app must mirror those available on linked pages outside the app.  But what about pricing and offers on marketing pages that aren’t linked to the app?  If the rules don’t apply there, publishers will be able to craft strategies that make it advantageous for customers to register outside the app, then download the app only for consumption purposes.  If, on the other hand, Apple has already closed this loophole, the fair-payment-for-services-performed and CLV arguments still apply.

Lastly, while this will certainly burden publishers, and especially those whose analog businesses are in heavy decline, as well as those who were 100% digital from the get-go, these new terms don’t amount to Armageddon for most.  Consider that for the time being, digital is a smaller segment than offline for traditional businesses, and within digital, Apple commands only one, albeit important, channel.  The magnitude will obviously vary by publisher.  But consider the example of the Financial Times, which reports that only 10% of its subs come through the iPad.

The bigger issue than the tax, I think, is that Apple has said that publishers will not receive customer names or email addresses unless opted-in by the new subs.  If they don’t, as will often be the case, it will make renewal marketing a bit more challenging (see the CLV argument), but not nearly impossible.  For instance, publishers could promote renewals through their service interfaces directly – as users log-in to access their content, the publishers will know who they are and the status of their billing relationships, even if not by specific name.  I suspect that smart, customer-minded publishers will make it worthwhile for users to opt-in, perhaps by offering something of incremental value, such as additional subscription months, exclusive content, or entry into a prize drawing.

Understandably, publishers need to make a lot of noise up front, and to vocalize their discontent with the new Apple terms.  After all, any charge that didn’t exist before is now going to negatively impact their margins.  But in the end, Apple is entitled to receive a commission for the channel it provides, and the more integrated purchasing experience is good for the consumer.  And a new channel with a relatively low customer acquisition cost is certainly good for the publisher.

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